Taking on Goliath

When executives at Paul Hemmer Companies, a Fort Mitchell, Ky.-based construction and real estate firm servicing Kentucky, Indiana, Ohio and Tennessee, decided to expand their retail division five years ago, they knew they were in for a challenge. The move, part of an overall growth strategy, was helped by the signing of several contracts with national retailers, including Ace Hardware and Dollar General, but it required the establishment of new contacts in the retail real estate community and the development of expertise in shopping center building and management. Previously, Paul Hemmer concentrated on industrial and office space.

Though the transition was difficult — the new areas of specialization required Paul Hemmer to create separate departments for construction, development, marketing and administrative functions, as opposed to having everyone work on the same projects and it paid off. A few months ago, the Cincinnati Business Courier put the firm on its list of 55 fastest growing privately held companies in the region. In May, the Cincinnati USA Regional Chamber of Commerce named it the top Small Business of the Year. And the 2007 ICSC Spring Convention marked the first time Paul Hemmer had a booth on the trade show floor. In the past, the firm's executives were attendees, but not exhibitors.

Hemmer's success shows that even in a world where the top 10 owners of retail real estate command a combined portfolio of more than 1 billion square feet, there is still plenty of room for small operators.

The challenge, though, is that increasingly REITs are expected to encroach upon niche areas where smaller developers have thrived, says Stanley Eichelbaum, president of Marketing Developments, Inc., a Cincinnati, Ohio-based consulting firm.

For now opportunities remain, he says. “We are still in a period of market elasticity and there is a reasonable amount of work out there that smaller firms can participate in,” he notes. “But [in the future], the world of opportunity for smaller developers will be more constrained than it has been.”

That means smaller firms that would like to succeed in shopping center development will have to pay closer attention to their business strategy. And the bit of wisdom that most old-timers, including Paul Hemmer Companies, offer is this: don't try to be David to the REITs' Goliath. The best thing that a smaller firm can do is take advantage of its size by becoming an expert in one product type, developing strong relationships within the real estate community in its home market and positioning itself as one that can offer retailers a level of local knowledge the nationals won't be able to match.

Building bridges

One of the greatest challenges for smaller developers when they start out is that retailers are reluctant to sign on to a project with someone they don't know, says Thomas W. Sudberry, Jr., president of Sudberry Properties, Inc., a San Diego, Calif.-based development and asset management firm with 1.8 million square feet of retail space in its portfolio. Often, it is difficult to even get a meeting with the person responsible for the retailers' real estate decisions. To gain credibility, smaller firms should surround themselves with consultants who already have a good reputation in the local real estate community, including brokers, architects and site planners.

Volunteering with ICSC is one of the best ways to meet new business contacts, including potential tenants. “Working with the retailers and government officials who are involved with ICSC has opened a lot of doors for us,” says Rod Castan, vice president with the Courtelis Co., a Miami, Fla.-based development and asset management firm that owns 2.5 million square feet of shopping center space.

And in the initial stages of building a portfolio, Eichelbaum recommends researching which of the local stores might be ready for expansion and then offering them appropriate sites instead of going after the bigger players from the start.

“It is, of course, unrealistic that a small developer out of Memphis, Tenn. will walk into Home Depot's headquarters in Atlanta and [get a contract],” he notes. “But the local restaurant, the local grocery chain, the local electronics player are the types of retailers that will work with you.”

A word of caution though — if you are marketing a site to prospective tenants, make sure to purchase it first. If all you have is an option to buy, you might be in for an unpleasant surprise. “The retailer might wait for your option to build to expire and get a more experienced developer to come in and do the project with them,” Sudberry warns. And it's a good idea to line up several interested parties for the site instead of concentrating on just one prospect. That way, a retailer will be more willing to sign with even a relatively unknown developer.

“If you've got the right site, they really want to be there and they will work with you,” says Jack Levermann, vice president of the Cincinnati development group with Paul Hemmer Companies.

Slow and steady wins the race

In their bid to break into retail development, Paul Hemmer executives also found it helpful to focus on a specialized product type — neighborhood shopping centers — instead of throwing a lot of money and resources into projects they do not yet have the experience or the resources to complete. Eventually, the company would like to expand its reach, but that has to be the result of organic growth, not gung-ho mentality, says John F. Curtin, III, senior vice president of the real estate and development division with Paul Hemmer.

“You can't be everything to everybody when you are a small, family-owned business and we tried to identify specific kinds of projects we wanted to get involved in, so that we could use our people to the maximum,” he notes. “We will not go from day one and compete with major developers in the U.S. who build $100 million retail centers.”

What Curtin hopes will happen is that the level of service Paul Hemmer offers its clients in smaller projects in its home market will convince them to hire the company for larger shopping centers down the line. That's another important point — the maxim that “the customer is always right” takes on an added weight when you are small.

But if they are considering expansion, Eichelbaum advises small developers to be cautious. It makes sense to go into neighboring markets first, to capitalize on already existing knowledge and relationships. And it's best not to open a new office unless there are enough projects in the new region to make that extra expense a necessity.

“We had such a great expansion [in the past few years], you have to wonder how much opportunity still exists, so I would be a lot more conservative with my resources,” Eichelbaum notes.

Size matters

Being smaller, however, does have its advantages. A family-owned firm might not have as much capital as a national REIT, but it also doesn't have a lot of overhead and a rigid corporate protocol for pursuing new opportunities. That often allows smaller developers to close deals faster, according to Castan.

Plus, being privately held means being able to take a longer-term view on investment, perhaps paying a little more for a piece of land or putting extra money into the center's architecture, knowing that the firm will reap greater rewards 10 or 20 years down the road. “I like being a smaller, private developer,” says Sudberry. “I like the flexibility and I can develop projects for the long term because I don't have to satisfy a public investor.”

The key is to concentrate on finding the kinds of sites that retailers covet and to remember that retail real estate is all about relationships — with brokers, with retailers and, when you need a joint venture partner with an extra wad of cash, with the national REITs themselves.